I made a resolution that I will write a blog about investing at least 3 times a month. Finding a topic to write about is often a challenge for me. I figured I could write about a conversation with my daughter a few days ago. I guess this counts as I was trying to explain investing to her.
It was a holiday for my daughter (M, she is 7) and my wife was working. So I was babysitting and trying to get some work done.
M, I guess was bored of playing with her dolls etc, and swings by my desk and says, Dad what is investing and what is it that you do?
I usually evade these questions and try and change the topic, but that day she was persistent.
Me: Let’s say there is a stationery shop in your school that is a bit special, they not only sell stationery, and they also buy stationery.
M: They also buy!! – that is strange.
Me: Well there are some more strange things about this shop and its owner. This shop is run by a quirky owner. There are no price tags on the stationery items. The shop owner randomly decides the price based on his mood. He is ready to buy or sell at that price at that moment.
M: Don’t shop owners sell at a price higher than they buy?
Me: Usually they do, but this is a special shop. One day the shop owner may buy or sell an eraser for 2 rupees and the next day he will buy or sell the same thing for 3 rupees.
M: Well that’s daft, people will buy when he sells for 2 and sell it back to him when he is buying for 3.
Me: Well that’s what most people try to do.
M: How does the shop keep running?
Me: There are some people who are ready to buy the eraser at 3 as they believe that the shop keeper will buy it back from them at 4 or 5 rupees.
M: He does that!!
Me: Sure he does, remember there are no price tags, he just come up with a price.
M: This seems silly, so what do you do?
Me: I buy and sell stuff to the shop owner.
M: I hope you are not buying erasers for 5 rupees!!!
Me: I try not to. I try and find out how much it costs to make an eraser and use that information to buy or sell.
M: How can you find out what it costs to make an eraser?
Me: Well, there is a real factory that makes the eraser, I do some work to find out the cost of making the eraser.
M: Why don’t you buy the eraser from that factory?
Me: Oh no, we are not allowed to from the factory. We can only buy form the shop. If I find out that it costs 1 rupee to make the eraser then I wait till the shop keeper is selling it for 70 paise or less and then buy it.
M: If it costs one rupee, why will the shopkeeper sell it for less than that?
Me: The shop keeper is strange that way, remember he has no price tags and he will buy or sell at any price.
M: What if he does not sell it for 70 paise?
Me: I wait till he does.
M: Why 70 paise or less?
Me: The factory does not give me the exact price, they tell me how much various ingredients cost and I have to figure out the cost. I am not sure if I am correct.
M: That should be easy, how can you make a mistake?
Me: Oh no, sometimes I make mistakes in collecting the information or sometimes in adding up the numbers. I am wrong 1 in 3 times.
M: That is silly, so you lose 1/3rd of your money?
Me: Not really, I buy only small quantities so I sell for less about 1 in 6 times.
M: What about other 5 times?
Me: I sell it to the shopkeeper, whenever he is buying for more than 1 rupee.
M: What if he does not buy for more than 1 rupee.
Me: I wait till he does.
M: Does this mean we are rich!!!
Me: Well, not really.
M: Hmm.. this is boring, I want to be a journalist or an actor and a model…. I am still trying to decide what I want to be….
Me: Yes there are definitely more interesting things that you can do.
M: ok…let’s go cycling…